Builders Shrink ‘Great Australian Dream’ as Priciest Home Market Falters

By Nichola Saminather - Dec 5, 2011 1:21 PM GMT+0700

Australian homebuilders are responding to declining demand and higher land costs by reducing the sizes of houses and lots.

Stockland, Australia’s biggest listed home builder, has cut the average size of plots in its house-and-land packages by almost 20 percent to 481 square meters (5,177 square feet) over three years. Australand Property Group (ALZ), a unit of Singapore’s CapitaLand Ltd. (CAPL), is redesigning homes as it shrinks them, while Peet Ltd. (PPC), which has 70 housing estates, is building on smaller lots with shared barbecue and exercise areas to compensate.

Higher prices for land and materials and increasing wages and taxes are pushing costs higher at a time the prices developers can charge are restrained as the developed world’s most expensive housing market cools. Home prices in Australia’s eight capital cities dropped 4 percent in the year to Oct. 31, according to RP Data, the most since the real estate researcher began compiling the figures in 1999.

“There’s an affordability crisis in Australia, and one way of keeping the price point where people can afford it is to reduce the size,” said Peter Sherrie, national president of industry group the Urban Development Institute of Australia. “With some innovative house designs, developers are able to provide a perfectly acceptable dwelling on a much smaller lot.”

Pursuit of the Great Australian Dream -- ownership of a stand-alone house on a quarter-acre piece of land -- has seen households double their debt load as a proportion of disposable income in the past 15 years to 154 percent in the quarter ended June 30, according to central bank figures. That’s higher than the 133 percent ratio Americans accumulated at the height of the U.S. sub prime-mortgage boom.

Australian Dream

The Great Australian Dream is a phrase derived from the American Dream, which equates prosperity and freedom with land ownership. In Australia, it encapsulates an idealized suburban lifestyle of grassy backyards, swimming pools and barbecues.

At 243.6 square meters, Australian houses are the biggest in the world, according to an August report by Commonwealth Securities Ltd., a unit of Commonwealth Bank of Australia. The average house in the U.S. was 222.2 square meters in 2010, Canada’s homes averaged 177 square meters and Japan’s 132 square meters, it said.

Stockland has decided to build smaller homes closer to public spaces rather than with big backyards, said Andrew Whitson, general manager for Victoria state at the company. The Sydney-based company has increased the proportion of homes on lots less than 450 square meters to 50 percent of all its housing projects, from 27 percent three years ago, it said at its full-year results presentation in August.

“The push is driven not only by affordability, but also to cater to our growing population and to make more efficient use of land,” Whitson said.

Stockland (SGP) climbed 1.2 percent to A$3.45 in Sydney today.

Urban Sprawl

With about two-thirds of Australia’s 22.8 million people living in the nation’s eight capitals, cities have historically expanded out, rather than up, to fit a growing population.

Melbourne, the nation’s densest city, had 530 people per square kilometer (0.4 square mile) and Sydney, the nation’s most populous city, had 380 as of June 2010, a March statistics bureau report shows. That compares with about 10,194 people per square kilometer in New York, according to the city’s department of planning, 6,017 in Tokyo and 7,126 in Singapore, according to statistics bureau data for each city.

State governments are now pushing developers to build closer to urban centers. Authorities require between 50 percent and 70 percent of new housing estates to be located within existing city limits, are restricting land releases on city fringes, and are demanding developers help pay for roads, transport and other amenities when building outside the limits.

Smaller Lots

“Developer charges, infrastructure charges are escalating,” said Andrew Harvey, senior economist at the Housing Industry Association, Australia’s biggest residential building organization. “They have to pay for schools and bike paths and a range of other gold-plated facilities, and that gets passed on in its entirety to home buyers.”

That’s helping push up the price of land plots even as they shrink. The average plot of land in Australian capital cities in the June quarter cost A$214,656 ($219,600), up 5 percent from a year ago, HIA data shows. The size has fallen 13 percent in Sydney to 525 square meters, 16 percent in Melbourne to 513 square meters, and 27 percent in Perth to 451 square meters from a peak about eight years ago.

New home sales fell 8 percent in the three months to Oct. 31, according to HIA. Sales of detached houses slumped 8.4 percent, while apartment sales declined 5.1 percent.

Rising Costs

Meanwhile, building costs are also rising. The price of building materials increased 2.1 percent in the three months ended Sept. 30 from a year earlier, and construction wages climbed 3.4 percent, according to statistics bureau data.

Australand is reconfiguring its homes as it downsizes them, replacing a third or fourth bedroom with smaller spaces that better suit a gym, media room or other use, said Rod Fehring, executive general manager of the Sydney-based company’s residential division.

“The number of households with one or two people in them has been rising, but we as an industry are still consistently designing three- and four-bedroom homes,” Fehring said. “Australand is moving away from the conventional definitions of bedrooms to activities that those spaces are used for, so they can have more flexible uses.”

Australand stock added 1.5 percent to A$2.74.

More than three-quarters of Australian households had more bedrooms than were needed to accommodate the occupants, according to a statistics bureau report released Nov. 16.

World’s Costliest

Australian homes cost 6.1 times the gross annual median household income, compared with 3 times in the U.S. and 5.2 times in the U.K., according to a report by Belleville, Illinois-based consulting company Demographia.

The median price for houses and apartments across all regions in Australia was A$316,000 as of Oct. 31, according to RP Data. That compares with a median of $171,475 in the U.S., based on figures from property website Zillow.com.

At Perth-based Peet, which owns, syndicates and jointly develops it projects, the push for smaller homes has been driven by both increasing development costs and demand from buyers seeking smaller dwellings that are easier to maintain, Managing Director Brendan Gore said.

“This includes many people who now don’t want a large backyard which requires time-consuming maintenance, but would like landscaped parks and open spaces nearby,” Gore said.

Falling Prices

While Peet’s average lot size has dropped as much as 20 percent in some areas over the past three years, community amenities such as exercise areas or barbecue facilities have increased, he said. Peet shares added 1.3 percent to 81 cents.

As the market sours, landed properties are losing value faster than apartments. House prices in Australian capitals fell 4.7 percent in October compared with a year earlier, while apartment values slipped 1.7 percent, according to Brisbane- based RP Data.

“The trend will absolutely be toward more smaller lot houses,” said Tim Lawless, director of research at RP Data. “There is demand for it based on affordability pressures. Developers want to maximize their yields, and potential buyers want to max the bang for their buck.”

Sydney-based Monarch Investments has reduced the size of its homes to between 160 square meters and 170 square meters, from 250 square meters two years ago, Chief Executive Officer Peter Icklow said. It is splitting normal 460 square-meter lots in half on two of its current projects, and building homes with smaller rooms and only one-car garages, he said.

“I can see the size of houses going down to 130 square meters,” Icklow said. “It will keep going down until people can afford them. The Great Australian Dream isn’t gone; it’s just a smaller dream now.”

To contact the reporter on this story: Nichola Saminather in Sydney at nsaminather1@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net